Africa Is Sweet Spot For Citigroup

Financial crisis response
As a result of the global financial meltdown, there has been a rapid depletion of liquidity in international markets, leading to a global reduction in the appetite for risk and more restrictive liquidity management.

Inevitably, this has adversely affected the ability of banks to offer trade finance in emerging markets. Africa has not been immune to this trend and this ongoing failure hitherto to bolster trade finance, particularly in the short term, could have undesirable implications for the continent.

Striving to build a comprehensive crisis-response strategy with the aim of boosting trade across the continent, Citigroup, the African Development Bank (AfDB) and the International Finance Corporation (IFC) have collaborated to provide up to $300m in trade financing for exporters and importers across the continent.

The financing initiative is part of the Global Liquidity Programme (GTLP), a public-private partnership that started in July 2009 to address the shortage of trade financing amid the global financial crisis.

The GTLP has targeted commitments of $4bn from public sector sources with forecasts stating the partnership will be able to support $45bn of trade in three years. “The innovative structure of this transaction will significantly increase the supply of trade finance in Africa, helping create jobs and boost economic growth at a time when the region is still facing a severe credit shortage,” says Lars Thunell, IFC Executive Vice President and CEO.

The IFC, which is a member of the World Bank Group and is the largest development institution focusing on the private sector in developing countries, has committed $1bn to the fund. Globally, and even in times of great uncertainty, the IFC managed a record $18bn in the fiscal 2010. The GTLP’s public-private structure permits investment in important sectors, particularly including food and agribusiness.

AfDB says that Citigroup “will originate a $175m portfolio in trade finance transactions from banks across Africa, focusing on low-income countries”. This means that the local banks, in turn, will be able to extend trade finance to importers and exporters.

The IFC and AfDB plan to fund up to 40% of the portfolio in order for Citigroup to have additional liquidity. Predictions indicate that the assets financed could generate up to $1.5bn in trade financing.

Also, to further their interest in managing the increasing flows of capital to Africa, Citigroup has kept a close eye on the South African market, where it is the largest international bank in the country and was able to increase its size, despite financial difficulty, with paid-up capital of R4.2bn ($2.8bn). Citigroup has a balance sheet of R53bn ($35.5bn).

It plans to target governments and large companies in Africa’s largest economy by inciting them to use their commercial cards. South Africa is the 50th country to take up Citigroup’s commercial credit cards, which allow clients to immediately track their payments.

This innovation presents significant new prospects for government departments, some of whom Finance Minister Pravin Gordhan has accused of wasteful spending, to be held to account.

Citigroup is also targeting heavyweight corporations such as Rio Tinto, currently the world’s third-largest mining company, with its commercial card services.

The company has also recently opened a desk in its South African subsidiary focusing on lending to Chinese businesses both initiating and expanding their operations on the continent. This close co-operation with Chinese investors is designed to improve their access to the massive investment flows between cash-rich China and resource-rich Africa.

Avid investor in technology
Citigroup is eagerly contemplating its year ahead in Africa but there is little as yet cast in stone. Buying a South African bank is, however, not on the agenda for now.

Speculation remains as to whether Citigroup’s commitment to an organic growth strategy is in earnest or mere artifice designed to camouflage its designs on one of South Africa’s local lenders.

Citigroup’s involvement in the partnership with the IFC and AfDB is a clear signal that the bank is looking to Africa to instigate growth, and furthers its commitment to the continent. However, CEO of Global Transaction Services Francesco Vanni d’Archirafi announced that integrating Africa in the bank’s global reach strategy will only come after the US government divests itself from Citigroup – a process which will continue through 2011. Even though the US Treasury recently sold stock, American taxpayers still own 13% of Citigroup.

Africa’s high-margin markets are clearly becoming increasingly competitive. The profit of local and Western banks in sub-Saharan Africa, excluding South Africa, was approximately $2.6bn in 2009. The Bank of China’s loans to Africa and the Middle East doubled last year to $3bn.

Two competitive features can be said to distinguish Citigroup. Firstly, the bank is highly liquid with some $345bn of liquidity on its balance sheet; this also represents an attractive opportunity for other banks that are unwilling to use their liquid cash pools. Secondly, the giant is an avid investor in technology, and its capabilities in this domain make it a good candidate for multinationals, companies and governments, all of whom are increasingly looking to private players to fund their expansion needs.

Currently only around 10% of the continent’s trade is intra-continental trade. The future economic prosperity of the region is tied not just to increases in export volumes but also to improved infrastructure and the further increased facilitation of cross-border trade. This will require innovations in African capital markets. Fortunately, demonstration of their keen appetite for African lending from institutions like Citigroup, driven by the innovations in African governance, resilient growth, strong demand for commodities and a rapidly rising middle class, mean that the requisite access to capital for further growth is emerging.